To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

March 2011

03/30/2011

An 18-tonne shredder truck roared and convulsed in a dusty dump yard-cum-warehouse in a quiet neighbourhood of Long Island. Needles on its speedometer-like dials flickered as it noisily chewed on 300 pounds of paper a minute – financial data, hospital records and personal letters -- to keep it all from prying eyes.

A small screen in between the dials, on the truck’s side, was alternately flashing images from the two strategically placed cameras inside the truck that caught the masticating machine in action. “See, that’s how we know what is going on inside,” said Sean Frederick, co-founder of Valley Stream, NY-based Code Shred, as he punches a red button to switch from one webcam view to another, in the shredding station right next to the six year old firm’s office.

Quite literally, this tiny firm is tearing down Wall Street, most of the Federal Reserve of New York and parts of Internal Revenue Service to bits and making big money off it -- building its business on the demand for document destruction from both corporate and government clients.

Fuelled by laws that tighten information security, soaring identity thefts and companies that imploded in the aftermath of financial meltdown, Code Shred with its vulture-like scavenging business, turned in 1055% growth between 2005 and 2008, ranked 157 on Inc’s 500 list last year and ended 2010 with over $3 million in revenues.

As individuals wake up to pervasive identity thefts – billed as the fastest growing crime in US --and corporations scurry to protect their data better, there will be a lot of shredding and cleaning up to do. And that is good news for Code Shred and its ilk.

The firm -- currently owned by Cintas Corporation after the Cincinnati-based firm bought it in mid-November -- was conceived, quite literally, mid-air when its co-founders Frederick and Micheal Milillio met on a Frankfurt to New York flight in 1998. They instantly hit it off and after six years of brainstorming, decided to go into the shredding business because “the prices here were all over the place” without any specialized firm providing a quality service.

“We moved from door to door in Manhattan moving boxes in our cars and taking it to an offsite of a recycler who didn’t care about shredding. He just wanted the volume (for recycling),” recalls Frederick of the initial months. They bought their first mobile shredding truck for $240,000 in October 2005. By the time the founders sold out to Cintas, the firm had 30 employees, seven shredding trucks, two box trucks and a van.

Future growth beyond their current scale, he explains, could only have come with a nationwide operation. It helped that Cintas, present in 74 locations and better known for making uniforms, was hungry at the same time. “We have been focussing on document destruction business for a while,” said Matt Peloso, Cintas’ point man in Code Shred’s office. “People can shred themselves too but they prefer calling us in who can shred and give a certificate of destruction. It’s kind of an insurance,” explained Peloso.

Identity theft is a big factor buoying this business. It hit 22,000 people in New York alone and nine million all over US, said Abigail Lootens, spokeswoman in NYC’s Department of Consumer Affairs, underscoring the need – and prospects – for shredding firms.

A report by California-based non-profit’s Identity Theft Resource Centre showed there were 662 security breaches in 2010 alone that exposed 16.167 million records. Of this, 42% breaches happened in the ‘business’ segment that left 6.626 million records vulnerable, followed by 4.854 million records compromised in the ‘banking/financial’ sector and 1.874 million in healthcare.

JP Morgan Chase – Circuit City(office) slipped up on 2.6 million records while Educational Credit Management Corp about 3.3 million, added the study. We know the numbers of exposed records laid in just half of the incidents, indicating the actual data leak could be exponentially higher.

NY’s consumer affairs department is fighting this menace through its annual ‘shred fest’. In 2010, Shred Fest’s third year, 40.02 tons of documents were shredded at Shred Fest, said Lootens.

But that’s not where Code Shred hit pay dirt. Residential clients are loose change. Its biggest customers are “the government departments, healthcare companies, law firms and then the financial institutions….in that order,” says Frederick. Federal Reserve Bank of New York and Internal Revenue Service are particularly the big ones.

With laws prohibiting “dumpster diving” – or scavenging trash for valuable information – and some such as HIPAA, Gram Leach Bliley Act, The Fair and Accurate Credit Transactions Act, The Economic Espionage and the recently enforced ‘Red Flag Rule’, it has become imperative for corporations across sectors to clean up and protect information.

Shredding has had a long checkered history. G.Gordon Liddy’s shredder-happy ways are well documented. So are the stories of Arthur Anderson auditors when they cleaned up Enron trails even after SEC probe had caught the scent of wrong doing. It is corporate folklore that Enron’s shredders worked overtime on Christmas and continued doing that well after the Congress and SEC had begun probe.

Oliver L. North saw John M. Poindexter tearing up a potentially embarrassing order signed by President Ronald Reagan authorization US participation in secret arms sales, according to NYT 1999 archives. Coca Cola executives shredded documents as they battled accusations of racial discrimination against blacks in 1990 and Johnson & Johnson destroyed documents that showed it marketed an acne medicine as a wrinkle cream.

Did Code Shred find some skeletons too? “We shred so much that we don’t think what it is. We just shred it,” Frederick shrugs. The client decides what goes in the shredder.

“We have shredded for a lot of mortgage companies. We lost money on most of them. They would just shut down (before paying us),” said Frederick. “We also shredded for a lot of bankrupt companies where the lawyers would just call us and say “hey, this is the location. It needs to be cleaned up. Just come and shred the stuff here!””

He doesn’t know what his trucks pulverize or whether any of it became subject of a lawsuit or federal enquiry later on.

“I pitched for Bear Stearns’ account in 2007 when there still was a Bears Stearns. They wanted 30,000 pounds of paper shredded everyday…and this was just from their Manhattan, Brooklyn and New Jersey locations!” said Frederick. The account went to a national firm – evidence that the recent Cintas buy-out positions it better.

The sector requires an upfront investment of $240,000-$260,000 a truck – a sizeable entry barrier to mount -- the bigger risk is from fluctuating recycled paper prices which yields a third of the revenues.

“In 2008, paper prices crashed from $240 a tonne to $40 a tonne,” he recalls. Margins were squeezed as shredding firms had been charging very small service costs and making it up with higher recycled paper revenues. That tap had ran dry in 2008.

Besides the initial investment, integrity of the employees is a critical issue. Every employee in Cintas-Code Shred is background checked for the last 12 years before being employed and half of them are checked yearly by rotation besides the random drug tests.

So what was Lehman Brothers was crushing in September, 2008?, I ask Frederick as we sidestep a huge conveyor belt in the warehouse behind the still convulsing truck. The shredded debris is now being punched and tied into gigantic square cubes using metal wires before being stacked atop each other. “Yeah..I would like to know that too. And who was shredding for them?” he muses.